Taming the Internet frontier

Michael TottyThe Wall Street Journal

Don't look now, but the freewheeling days of the Internet are ending.

Since its infancy, the Net has been seen as a place independent of the rules that governed the offline world. Borders could be transcended, new identities created, and old notions of property didn't apply.

This vision was summed up in a 1996 "Declaration of Independence of Cyberspace" by John Perry Barlow, a founder of the Electronic Freedom Foundation, who warned the old world's political powers: "Cyberspace does not lie within your borders. ... Your legal concepts of property, expression, identity, movement and context do not apply to us."

Versions of this idea still have currency among some libertarians and legal scholars, but it's getting harder to see the Internet as a refuge from the rules and regulations that hold sway offline.

If the early cyberspace was a separate frontier, outside the reach of governments and laws, it's now beginning to look more like a later version of the Old West -- the one where settlers, marshals and lawyers come in and impose law and order.

'Demand for rules'

Just consider: The entertainment industry is tracking down relentlessly those who it says are violating its copyrights, and courts consistently have backed the industry. Law-enforcement agencies are cracking down on Internet gambling and persuading credit-card companies to help.

And it isn't only Big Brother or Big Business reining in the Net. Consumers are also demanding tougher action to stop spam and protect privacy.

"We've reached the point where the demand for rules is about to replace the demand for chaos," said Debora L. Spar, a professor at the Harvard Business School. She is the author of "Ruling the Waves: Cycles of Discovery, Chaos, and Wealth," which describes how new technologies create unruly frontiers that are eventually brought under control.

Since it first captured the popular imagination, the Internet has, to a great extent, been able to resist efforts to tame it. Remember the Communications Decency Act, which sought to protect children from "indecent" material online and which the U.S. Supreme Court eventually declared invalid?

Even now, the music industry's crackdown on Napster Inc. and its numerous successors has hardly made a dent in the widespread downloading of music online. Defenders of the unregulated Net insist that the very nature of the global network -- its openness, its ability to transcend borders -- is immune from total government control.

"Trying to regulate the Internet is like trying to push a rope," said George Colony, chief executive of Forrester Research Inc. in Cambridge, Mass. "The technology is morphing too fast."

Cutting both ways

Maybe so, but technology cuts both ways.

Lawrence Lessig, a Stanford University Law School professor and author of two books about regulating the Internet, noted that digital technology actually can make it easier for copyright holders to block unauthorized users. It's possible, for instance, with digital-rights management systems, to monitor and control the number of times a digital copy is used or shared. Have you tried buying a used e-book? It can't be done.

Courts and governments from New York to Washington to Beijing already are treating cyberspace like any other place within their jurisdictions. During last year's legislative session, more than 400 bills seeking to govern some aspect of the Net were introduced in Congress, according to the Competitive Enterprise Institute, a Washington-based organization that favors limited government.

Even the notion of a separate place called "cyberspace" may be fading: A search of the Nexis database by legal scholar Andrew Shapiro found that over the past three years, during randomly chosen weeks, the term "cyberspace" was cited 744 times in 2000, 388 times in 2001 and 291 times in 2002.

What's more, while many people still see the Internet as a wild and woolly place -- beset by pornography, credit-card thieves and music pirates -- the reality is different. Those things do exist online, of course -- just as they do in any city in America -- but they're increasingly confined to the margins.

Talk of taxes no longer taboo

For another indication of where the Internet is headed, consider a subject once considered taboo but now back on many legislative agendas: taxing online sales.

When e-commerce was in its infancy, its pioneers argued that it needed to be treated as a tax-free zone in order to survive and grow. They persuaded Congress in 1998 to adopt the Internet Tax Freedom Act, which placed a moratorium on taxing Internet access and on any discriminatory taxes on online activities.

Discriminatory taxes meant taxing an online transaction when the same type of transaction performed offline wouldn't be taxed. The moratorium didn't address sales taxes specifically, but the threat of possible congressional action managed to discourage state and municipal governments from imposing taxes on online purchases just the same.

Such a dictum no longer sits well with state and local governments, which last year missed out on $13 billion in tax revenues. And more than 50 major retailers and shopping-mall owners have said that they like it even less, objecting to what they say are unfair tax subsidies for their online rivals.

In November, delegates from 33 states and the District of Columbia came up with a plan that would streamline collection of sales taxes on e-commerce. To take effect, legislatures of at least 10 states representing 20 percent of the U.S. population first would have to approve the system, then Congress would have to pass a law allowing states to require sales-tax collection by online retailers that don't have a physical presence, or nexus, in the state.

It's too early to say how likely this is to happen. But that the plan has made it this far signals that momentum is shifting toward taxing online sales.

But some states aren't waiting. The California Board of Equalization, which administers state sales and property taxes, recently ruled that online bookseller BarnesandNoble.com must collect taxes on sales to customers in California. The board argued that the online merchant meets the criteria for a taxable entity in California because it has a physical presence in the state -- the bricks-and-mortar stores of Barnes & Noble Inc.

Even though the companies are incorporated separately, the board said a link existed because the latter gave shoppers at its traditional stores coupons for a $5 discount at the online store. Similarly, Arkansas and Minnesota have adopted laws requiring online retailers to collect taxes if they have local affiliates that accept exchanges or returns for online purchases.

In their eyes, having physical stores present to facilitate such services as product returns and exchanges outweighs the relatively small drawback of having to add sales tax to the price of an online purchase, said David Cowling, a tax attorney in the Dallas office of the law firm Jones, Day, Reavis & Pogue.

The copyright battle

In the most hotly contested legal arena, copyright, cyberspace libertarians can make a good case that the Net makes it impossible to stop widespread sharing of music and videos. (Call it piracy, if you'd like.) The recording industry's success in shuttering Napster in 2001, for example, has simply sent consumers to other file-sharing services, such as Kazaa and Morpheus.

Kazaa, for instance, saw its average monthly users grow to more than 9 million last year from 1 million in the middle of 2001. At the same time, a court in the Netherlands, where Kazaa BV is based, recently ruled that the service wasn't liable for copyright infringements committed by its users, in effect creating a file-swapping haven from U.S. entertainment companies.

So, while the entertainment industry may be winning most of its legal battles, it seems to be losing the war: Mark not only the Kazaa decision, which still could be overturned by the Dutch Supreme Court, but the startling truth that downloading of music, and now films, continues unabated despite the myriad lawsuits.

A closer look, though, suggests that the war has entered a new phase, as the entertainment industry has struck back with an even broader offensive.

Last fall the Recording Industry Association of America sent letters to more than 2,000 universities urging them to crack down on illegal music sharing on campus. An even tougher message from the RIAA and the Motion Picture Association of America was sent to executives of the Fortune 1,000 companies, warning that firms could be liable if employees used their networks to swap copyrighted material.

The entertainment industry also is hammering away at Internet service providers to turn over names of customers who are swapping large numbers of files.

"This is not a problem that is susceptible to short-term solutions," RIAA President Cary Sherman said of copyright protections on the Internet. "It's a long-term issue with long-term approaches."

A tough proposition

In some cases, enforcing law and order on the Web will be just as difficult as in the physical world.

Gambling is a case in point. Vice always seems to do well on the frontier, and the Internet has been particularly hospitable to gambling. By the latest estimates, about $3.5 billion will be wagered this year on 1,800 Internet gambling sites, mostly located in Costa Rica or other offshore locations.

And even though there are plenty of laws in the U.S. making it illegal to place an Internet wager, online gambling sites get about 60 percent of their revenue from the U.S., according to an analysis by Bear Stearns & Co.

Law-enforcement agencies have zeroed in on the weak link in most online-gambling transactions: They're putting the squeeze on the credit-card companies and other online payment vehicles that make online betting possible.

Last summer, New York State Attorney General Eliot Spitzer forced Citigroup Inc.'s Citibank unit, the nation's largest credit-card issuer, to agree to quit taking charges for online bets. Similar pressure from Spitzer on the online payment service PayPal Inc., a unit of eBay Inc., resulted in that service's agreeing to prevent New York residents from using it for online gambling.

What's more, at least 400 banks that issue MasterCard and Visa credit cards have refused to honor online bets -- not because they fear the wrath of law enforcement, but because in many states they can't rely on the law to go after deadbeats.

Though online casinos have tried to develop alternatives to credit cards, and some Internet gamblers do say it's still easy to place their bets, squeezing the money supply is having an effect: Analysts have slashed their forecasts for online gambling revenues to $4.2 billion for this year, from the $6.2 billion previously projected.

Some industry analysts predict, however, that as more regulation eliminates outlaw gambling operations, it will clear the way for even more gambling in the form of well-established players aided by the latest technologies.

For instance, MGM Mirage Corp. the Las Vegas-based casino company, recently announced that it plans to inaugurate an Internet casino based on the Isle of Man. But it will refuse bets from residents of the United States, blocking them with software that pinpoints the physical location where someone has logged on and then further screening by matching the user's identity with public data, including voter-registration records.

"A fundamental shift in the business" is under way, said Michael Tew, a gaming analyst for Bear Stearns & Co. "Ultimately, the online gaming industry will flourish in markets that are highly regulated."

Foolproof methods?

None of these measures have to be foolproof to succeed, however. Most people are law-abiding, and it usually only takes raising the barriers to prohibited behavior to get others to follow the rules as well.

Where the Internet's rules have their biggest effect is on what Ohio State University law professor Peter Swire calls "elephants" -- large organizations that have a big physical presence, like the bricks-and-clicks chains, universities or MGM Mirage.

"Elephants are powerful and have a thick skin, but are impossible to hide," Swire said. "Once legislation is enacted, they likely will have to comply."

Swire contrasted the elephants with the "mice" -- small, mobile players, like pornographers or illegal gamblers -- who can avoid prosecution by hiding in the odd corners of Internet.

When the mice become numerous enough to be a problem, then states or countries can cut off their food supply -- money -- or their habitat -- their Internet service provider. But mostly, they're left alone because it's too much trouble to root out each one.

"There will always be mice out there who will run a child porn site, or a gambling site, or a copyright infringement site," said Pamela Samuelson, a law professor at the University of California at Berkeley. "That's just a fact of life."